Natalia Orlova: “This is not an economic crisis. It's just a sudden stop”
The head of the centre for macroeconomic analysis of Alfa-Bank about the shocks to the real economy and government's anti-crisis measures
On 14 April, at Alfa-Bank's open webinar 'Economic Challenges of the Pandemic', well-known expert in economics and finance Natalia Orlova, the head of the bank's center for macroeconomic analysis, spoke about the shocks that the economy is experiencing because of the pandemic and tried to predict when the markets will start to recover. Read brief summary of her speech in the material of Realnoe Vremya.
Popular analogies and too open Europe
Natalia Orlova started effectively: she reminded that many experts compare the coronavirus with the Spanish flu epidemic that raged at the beginning of the 20th century. In turn, this implies that “there are great concerns about the subsequent waves of the epidemic”. Another analogy: most analysts compare the current global economic crisis with the situation in 2008. But Orlova believes that there is a fundamental difference: now the main impact is not on the financial market but on the real sector of the economy.
So far, as we know, the European economy is suffering the most from the pandemic. According to the speaker, the reason for this is its huge openness. For example, large shocks are associated with a stop in transport communication. Before the pandemic, incoming passenger traffic in Europe had been comparable to its population in annual terms. In Russia and the United States, the picture is different: the incoming flow of visitors is only about 15-17% of the country's population. Orlova believes that this is why the United States and Russia are now much less being affected by the traffic stop. And China's sensitivity to this issue is minimal.
The European economy is also suffering from the breakdown of trade ties because goods flow from European countries is largely concentrated within the Eurozone itself. At the same time, trade provides 68% of GDP in the EU countries. In contrast, in Russia, China, and the United States, the economies are more closed and less vulnerable to a halt in economic activity. Although, of course, for them (that is, for us), the crisis can be quite painful.
The European economy is also suffering from the breakdown of trade ties because goods flow from European countries is largely concentrated within the Eurozone itself. At the same time, trade provides 68% of GDP in the EU countries. In contrast, in Russia, China, and the United States, the economies are more closed and less vulnerable to a halt in economic activity
In the second quarter, Russia is expected to decline by almost 8%, and then until the end of the year, the economy is also likely to remain in the red. Economists expect a year-end decline in GDP of about 2%. But we don't know the main thing: when the pandemic and quarantine measures will end. As they continue, damage assessments will also shift.
Measures to support the economy: “We don't look very impressive right now”
There is a big difference in the support packages that different countries direct to their economies. For example, in the US, the scale of support has now reached a total of 40% of GDP (taking into account the $2 trillion promised by the Fed last week). Many countries understand that this is a political decision, so they provide a wide variety of subsidies. In particular, in the US, these are direct payments to the population. In the UK, loans are issued to finance salaries. In any case, this is financial support for the final demand. Many countries do this through the support of entrepreneurs.
In our country, according to the speaker, “the set of government measures is very, very limited”. But it is still unclear: tax loan repayment holidays and other support measures have not yet been completely clarified.
Now the government is constantly proposing new measures and clarifying the scope of financial support. Finally, it is not yet known what amounts this will be expressed — the Central Bank has not yet decided on this issue. But experts believe that in general in Russia we are talking about about 2% of GDP due to tax and loan repayment holidays. “Now, of course, we do not look impressive," stated Orlova. In her opinion, the inexplicability and uncertainty lead most entrepreneurs to think that they need to cope themselves.
Now the government is constantly proposing new measures and clarifying the scope of financial support. It is not yet known what final amounts this will be expressed — the Central Bank has not yet decided on this issue
Oil is the main reason
But it wasn't just the coronavirus that has played a role in the shock events. One of the reasons for the severity of the blow to our economy is related to the situation in the oil market. “The OPEC deal that collapsed in March brought oil prices to significantly lower levels than initially expected," the speaker recalled one of the most obvious problems.
In recent years, the country has been trying hard (and quite successfully) to reduce the scale of budget dependence on oil. If in 2014 the price of oil, balancing the budget, was above $100 per barrel, then in the last 2 years it has been $49 per barrel. And this is one of the best indicators for oil-producing countries. For example, this indicator is higher than $80 per barrel in Saudi Arabia.
But now, when oil is trading around $30 and a little, the budget is deficit. According to Natalia Orlova's assessment, the tax holidays will cost the budget about 1,5 trillion rubles this year. For the Russian economy, this will be equivalent to oil falling by another $10 per barrel. This challenge, according to Orlova, explains some of the rigidity of the Russian budget in terms of support measures.
Risks of social challenges
Orlova also predicts the risks of social challenges, the scale of which is unclear yet. Over the past 3 years, the real income of the population has not been growing. The coronavirus pandemic puts their growth at great risk this and next year. This means that we need to continue increasing social benefits.
Plus the pension reform. In 2034, 10 million people will not receive pensions because they are transferred to the status of working. “Of course, this is a certain blow to the standard of living, especially for the elderly," says Orlova. In this regard, she says, there is a great risk that the government will need to support not only the affected companies, but the population, which will become even more impoverished.
Over the past 3 years, the real income of the population has not been growing. The coronavirus pandemic puts their growth at great risk this and next year. This means that we need to continue increasing social benefits.
The main thing is to keep large companies working
According to Orlova, the main thing now is to maintain the work of large companies: if the core ones work, it will create demand for the services of small and medium-sized businesses. Orlova noted as a positive factor that the Russian economy is less indebted than developed countries. Russian companies' debt is 50% of GDP, and households' debt is about 16%. At the same time, the debt of the corporate sector of European countries and America is at the level of 120-130%. Households in these countries have loans in excess of 70-80% of the gross product. And another not obvious advantage of our economy is the low share of small and medium-sized businesses in GDP (only 20%). “This will determine the smaller scale of the shock for Russia to some extent," Orlova believes.
She suggested that many companies have enough resources to survive a month of forced shutdown.
“I very much hope that it will probably be the month of August, when we traditionally have a lull. Or like January. And then a lot will depend on the decision to extend the quarantine — and this already depends on the dynamics of the epidemic," said Orlova.
The dynamics of the ruble shows the real market value of the exchange rate
The question that interests many now is: should we expect the Central Bank to let the exchange rate float freely and raise the key rate?
Natalia Orlova is sure that such scenario is not considered at all. She noted that there are many comments in the press about the Central Bank's currency interventions. “The Central Bank sold only $2 billion in March. Well, it's just a very small amount. Since the beginning of April, it has sold about a billion dollars. This is also, in principle, not very much. Just to give you an understanding, export revenues in Russia are 30 billion dollars a month," she commented on these reports.
We are having a floating rate. Orlova believes that the dynamics of the ruble, which everyone now sees, is its real market value.
When the oil price is $30, the exchange rate should be 77 rubles. Now it is slightly stronger than its equilibrium level, but only slightly: it should have been 75 rubles
When the oil price is $30, the exchange rate should be 77 rubles. Now it is slightly stronger than its equilibrium level, but only slightly: it should have been 75 rubles. There is absolutely no point in raising the interest rate to stabilize the exchange rate. “This is why we switched to floating exchange rate, so that the Central Bank had the right to do with its interest rate what it needs for the domestic economy," the speaker stressed.
According to her, by the end of 2020, most experts expect a smooth strengthening of the ruble exchange rate, and in 2021, stabilization should come.
It is more likely that incomes will fall than unemployment will increase
Orlova noted a huge — up to 30% — variation in unemployment forecasts. She herself predicts a small increase — only up to 6%. The speaker comes from a shortage of labour resources. But the real income of the population will decrease, according to Orlova. The fact that the residents of our country are heavily indebted makes them more compliant in terms of switching to lower levels of pay, the economist is convinced.
She cited the example of the United States where the unemployment rate is discussed at 20-30 per cent: after all, its share of small and medium-sized businesses in GDP and employment is somewhere 60-70%. Roughly speaking, 20% unemployment rate means that a third of small and medium-sized companies in the US are going to close. Our share of SMEs is not so high either in terms of employment or GDP. Therefore, with the same number of closed companies, unemployment will be significantly less, the economist is convinced.
Besides, according to Orlova, if in developed countries quarantines are strictly observed, then our regime is actually milder than it is claimed. Many businesses continue to operate in the new environment. Of course, this does not apply to everyone: in some segments, the impact is strong. But in general, Russia has an economy with a very high share of government employment and the employment in large companies. Therefore, the expert believes that in our country, income is likely to decrease rather than the unemployment rate to increase.
Besides, according to Orlova, if in developed countries quarantines are strictly observed, then our regime is actually milder than it is claimed. Many businesses continue to operate in the new environment
The return to pre-pandemic levels will begin in the summer
According to Natalia Orlova, we are now being “at the epicentre of the crisis.” It is not known for sure how the situation will develop in the second half of the year, but the expert suggests that the world and Russian economies are likely to return to the pre-pandemic state from mid-summer.
The speaker explains this quite unexpectedly: what we are experiencing now is not an economic crisis. If people don't show demand for services now, it doesn't mean they don't have money: they just physically can't leave their house, including to spend the money earned remotely. “I am not as pessimistic as many experts. This is just a sudden stop because of the epidemic," she concluded.